Friday, October 23, 2015

Update on IBM & P&G

Both IBM & Procter & Gamble both reported earnings this week.  I do not plan on going into specifics of each report. Instead I'll mention some noteworthy items.

Lets start with IBM

"In the third quarter we again made progress in the transformation of our business to higher value, with strong growth in our strategic imperatives and expanded operating margins,” said Ginni Rometty, IBM chairman, president and chief executive officer. "We are continuing to make significant investments to build platforms around analytics, cloud, mobility and security that lay the foundation for a new era of cognitive business -- where we see long-term value for our clients and shareholders."

In other words we are struggling right now with the business, but patience is needed as we continue our turnaround. The move into cloud, data analytics, and other services is proving much tougher than the company originally projected. Although I think they are making solid sales gains in the space. YTD strategic imperatives are up 20%.  Specifically cloud revenues are up 45% YTD and have reached $9.4 billion the trailing twelve months.  The cloud is going to be a big move. It's so big that Microsoft has decided to give away free upgrades to it's platform in hopes that users will want to migrate to its extra cloud services, and their sales-force has been heavily pushing it's cloud options onto business' of all sizes.  So unfortunately patience is warranted as it's a competitive field all around.

 The company re-affirmed it's full year non-GAAP guidance of $14.75-15.75. Back in Q1 the company had originally guided non-GAAP for $15.75-16.50. Obviously not good to miss your own numbers for the year. GAAP results are expected to come in at $13.25-14.25. I prefer GAAP results as it's less prone to financial maneuvering.  If today were January 1st, 2016 we would have a GAAP P/E(TTM) of around 11 based on the current stock price. Add in the dividend of $5.20/share and we have a total stock yield(5.20+13.25/145) of 12.7% as of today at the low end of GAAP guidance.  If we knew the turnaround was complete this could be a very nice entry point. I'm going to keep an eye on the technical's as they are close to oversold territory. The stock seems to be finding support around $140 too. However for a fundamental take I think it might be prudent to wait until the next quarter and guidance for 2016 comes out. If the stock continues to get cheaper I might make an add to the existing position.

P&G(PG) is another longtime dividend champion dealing with declining sales revenues. Although the market met results with an upbeat tempo as the stock popped higher today. Yet as a consumer staple it's not as important to dwell on revenue, but instead on margin and cash generation. GAAP operating profit came in at 22.8% vs 19.4% for the same quarter last year. Nice to see that improve from a quarter a year ago. Cash generation is also still big as the company had cash from operations to the tune of $3.5 billion. After taking out Capex we have FCF of $3 billion for the quarter. Based off the cash flow statement provided in the earnings release the payout ratio 62% from FCF, and 52% when compared to operating cash flow.

Personally I'd like to see the competitive pressures ease a bit more before adding to the position. Also the stock has had a nice move up since it's foray into the high 60's a couple months ago. Otherwise it's business as normal for this one. Unless WB sells his position I'm going to sit back and collect the dividends.

Have a nice weekend!

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